LONDON (Reuters) - World stocks hit a 1-1/2 week low on Friday, on track for their biggest weekly loss since August 2010, as a Moody's threat to downgrade Spain revived fears the euro zone crisis is spreading, and investors eyed a looming deadline for U.S. debt talks.
U.S. stock futures dropped, indicating a weaker open on Wall Street, and the dollar hit a four-month low against the safe-haven yen, as U.S. lawmakers made little progress in breaking the deadlock over raising the debt ceiling and avoiding a default.
An emergency meeting is scheduled for Friday to reach a deal on raising the country's $14.3 trillion (8.78 trillion pounds) debt ceiling by the August 2 deadline to avoid running out of money.
Rating agency Moody's placed Spain's Aa2 credit rating on review for possible downgrade, citing weak growth and funding pressures. This followed Thursday's disappointing Italian auction which saw 10-year bonds sold at the highest yield in 11 years.
Spain's prime minister Jose Luis Rodriquez Zapatero called early elections for November, saying the move was to promote stability.
"These sovereign debt problems are leading to a decent demand for safe-haven currencies like the yen and the Swiss franc," said Roberto Mialich, FX strategist at Unicredit.
"How the dollar behaves in the near term will depend a lot on ... whether the U.S. rating is cut."
The MSCI world equity index fell 0.5 percent. The benchmark index is down 6.5 percent since hitting a three-year high in April and has fallen nearly 3 percent this week.
Futures for the S&P 500, for the Dow Jones and for the Nasdaq 100 were down 0.35 to 0.45 percent.
According to Thomson Reuters data, 51 percent of DJSTOXX 600 .STOXX companies reporting second-quarter results have met or beaten expectations.
European stocks .FTEU3 lost 0.87 percent. A string of disappointing corporate results in the euro zone encouraged investors to cut back on risks ahead of the weekend.
Emerging stocks were down nearly 1 percent, though analysts said flows into emerging debt have remained resilient.
The dollar .DXY hit a four-month low against the safe-haven yen at 77.43 yen, approaching a record low around 76.25, before trimming losses to 77.60. It fell 0.2 percent against the Swiss franc to 0.80, just above record lows.
The euro fell 0.57 percent to $1.4271, extending losses as traders cited media reports saying Europe's rescue fund may not be in a position to provide its second tranche of loans for Greece.
The report is in line with what sources told Reuters earlier this week.
U.S. crude oil fell 0.25 percent.
Bund futures rose 49 ticks. Spanish 10-year bond yields were 5 basis points higher at 6.09 percent.
Italian 10-year yields were 8 basis points higher at 5.92 percent, nearing the 6 pct line many see as unsustainable in the long term.
In the United States, even if lawmakers agree on a last-minute deal it was uncertain whether the country can retain the riple-A rating that helps make U.S. debt a pillar of the global financial system.
"No one really thought we would ever get to this situation," Ben Potter, strategist at IG Markets, said.
"We're basically standing on the edge of an abyss, peeking over, with the bottom nowhere to be seen. That's the situation facing all financial markets heading into a weekend that could prove to be one of the most crucial in history."
(Additional reporting by Anirban Nag; Editing by John Stonestreet)